The global financial crisis has taken supply risk to a new level. More than 75,000 businesses in the US have filed for bankruptcy since the beginning of 2008 and the number is expected to rise again this year. Credit remains extremely tight. Inventory and capacity reductions, layoffs and hiring freezes have reduced suppliers’ abilities to respond to fluctuations in demand. Companies that take these issues head on and attack risk now will gain not only a valuable insurance policy against disruptions to their business, but also competitive advantage and substantial bottom-line savings. But doing so requires a new approach.
How can companies effectively minimize their risk under current conditions? Based on lessons learned throughout the recession (and my helping to organize the input from a lot of our risk experts in the field for a Supply Risk Center), I’d like to offer the following tips:
- Don’t be fooled. Supply risk is not going away just because the economy is improving. No one can be sure when the recession will end. But one thing is clear: companies will face more supply risks and challenges than ever before. Make sure your organization has the right tools and processes in place to effectively manage and overcome them. Include risk management in your sourcing strategy. Audit the financial, operational, and balance of trade exposure of your most strategic and mission-critical suppliers. Look for early warning signs such as drops in quality or shipment delays. Increase the frequency of supplier performance reviews. And automate your supplier management process.
- Learn to operate in the “New Normal.” The manual, spreadsheet-driven approach traditionally used to manage supply risk will no longer cut it. Organizations need to leverage flexible, technology-based solutions and processes that allow them to respond quickly to changes in market conditions and business needs as they arise rather than just relying on historical financial metrics and calculations.
- Understand that all risk is not the same. Supply risk is often spoken of as a single entity. In reality, there are different risks in your supply chain, each with a different set of challenges, impacts and mitigation techniques. Understanding and mapping these risks is the first step to controlling them.
- Engage multiple stakeholders. Make sure any supply risk initiative is driven by a cross-functional team. This will help secure C-level support and resources and provide access to specialized skills needed to effectively assess risk and deliver results.
- Commit for the long haul. Companies will never be able to completely eliminate risk from their supply chains. However, by taking a sustained approach to managing it and mapping efforts and resources to their priorities, they can mitigate its negative effects.
The threat of supply risk is greater and more real than ever. Companies that start a comprehensive risk management initiative today will be prepared to deal with this threat and position their organizations to compete more strongly when economic conditions improve.